Deck 5: Project Evaluation: Principles and Methods

Question 1

A project that may be accepted or rejected without affecting the acceptability of another project is known as:

A)an independent project.
B)an additional project.
C)a mutually exclusive project.
D)a feasible project.

Answer 1

an independent project.

Question 2

Project B has a cost of $23 956 and its expected net cash flows are $6000 p.a.for the next five years.If the required rate of return is 10%,what is the net present value of the project?

A)$12 674.60
B)$1211.80
C)($1950.77)
D)($1211.80)

Answer 2

($1211.80)

Question 3

The internal rate of return of a project is the rate of return that equates the present value of its net cash flows with its:

A)outflow.
B)working capital.
C)initial cash outlay.
D)required rate of return.

Answer 3

initial cash outlay.

Question 4

Using the benefit-cost ratio the decision rule is to accept projects with a benefit-cost ratio:

A)equal to 1.
B)less than 1.
C)greater than the opportunity cost.
D)greater than 1.

Question 5

Benefit-cost ratio is calculated by:

A)dividing the present value of future net cash flows by the initial outlay.
B)dividing the present value of cash flows by the working capital.
C)dividing the present value of future net cash flows by the sum of initial outlay and the working capital.
D)dividing the total cash flows by the initial outflow.

Question 6

Benefit-cost ratio is also known as:

A)benefit-cost index.
B)total profit index.
C)profitability index.
D)discounted cash flow index.

Question 7

Capital-expenditure management involves which of the following?

A)Determining which expenditures can be capitalised for accounting purposes.
B)The planning and control of expenditures incurred in the expectation of deriving future economic benefits in the form of cash inflows.
C)The amount of expenditure required by a company so that they are exempt from capital gains tax.
D)Planning the amount of a company's annual budget that will be spent on human capital.

Question 8

The net present value method differs from the internal rate of return method in that:

A)the net present value method discounts cash flows using the risk-free rate of return and the internal rate of return method does not.
B)the internal rate of return method finds the rate of return that results in a zero net present value.
C)both methods yield similar conclusions for mutually exclusive projects.
D)the net present value method discounts cash flows by the required rate of return,whereas the internal rate of return method does not take into account the time value of money.

Question 9

Project K has a cost of $52 125 and its expected net cash flows are $12 000 p.a.for eight years.If the required rate of return is 12% p.a. ,what is the net present value?

A)$38 307
B)$7486
C)($7486)
D)($38 307)

Question 10

Which of the following statements concerning capital expenditure is false?

A)Capital expenditure involves evaluation and comparison of alternative investment proposals.
B)Capital expenditure involves budgeting cash flows and the means of financing them.
C)Capital expenditure involves the generation of investment proposals.
D)Capital expenditure involves the economic evaluation of a proposal.

Question 11

The assumed financial objective of a company is to:

A)maximise profits.
B)minimise costs.
C)maximise revenue.
D)maximise shareholders' wealth.

Question 12

A necessary condition for multiple internal rates of return is that one or more of the net cash flows in the later years of a project's life must:

A)be positive.
B)be negative.
C)exceed the required rate of return.
D)be greater than the initial outlay.

Question 13

If it is feasible to undertake a project irrespective of the decision concerning the acceptance of another,the two projects are said to be:

A)independent.
B)dependent.
C)mutually exclusive.
D)none of the given options.

Question 14

Which of the following items of information is not necessary for project evaluations?

A)The initial cash outlay.
B)The life of a project.
C)The internal rate of return.
D)The required rate of return.

Question 15

A post-completion audit of investment projects is important because:

A)wasted expenditure may be avoided if internal control systems are in place.
B)approval of an investment proposal is required before expenditure can take place.
C)accountants need to understand the capital expenditure process when auditing it.
D)it provides valuable information to enable implementation of improvements in the project's operating performance.

Question 16

EVA can be shown as:

A)
B)
C)
D)

Question 17

The number of internal rates of return is limited to the:

A)number of investments being evaluated.
B)number of sign reversals in the cash flow stream.
C)direction of sign reversals in the cash flow stream.
D)none of the given options.

Question 18

Project X has a cost of $53 847 and its expected net cash flows are $12 000 p.a.for the next eight years.What is the project's internal rate of return?

A)13%
B)12%
C)15%
D)9.5%

Question 19

Using the EVA,one should invest only if the increase in earnings is sufficient to cover the:

A)net cash flow.
B)value of the investment in year t.
C)required rate of return.
D)value of the investment in year t + 1.

Question 20

Project B has a cost of $23 956 and its expected net cash flows are $6000 p.a.for the next five years.What is the project's internal rate of return?

A)10%
B)8%
C)9%
D)7%

Question 21

Which of the following statements is false?

A)The internal rate of return is the discount rate that results in a zero net present value for the project.
B)The internal rate of return represents the rate of interest that results from the recovery of the investment outlay,plus a return on the investment project during its life.
C)The internal rate of return represents the rate of interest that recovers the initial investment outlay.
D)The internal rate of return is the discount rate that results in a zero net present value for the project.It also represents the rate of interest that results from the recovery of the investment outlay,plus a return on the investment project during its life.

Question 22

If a project has an expected life of three years,requires an initial outlay of $5000,has a net present value of $2205.40 and an accounting rate of return of 40%,and promises a uniform cash flow over its life,how much depreciation is being deducted on an annual basis if the required rate of return is 12% p.a.?

A)$800
B)$1000
C)$550
D)$430

Question 23

Which of the following statements about the net present value method of selecting projects is true?

A)If projects are independent,then the project with the highest net present value (providing it is greater than zero)is accepted.
B)If the projects are mutually exclusive,then all projects with a net present value greater than zero are accepted.
C)For two mutually exclusive projects,the net present value and internal rate of return methods select different projects if the required rate of return is greater than the discount rate at which the two net present value profiles intersect.
D)If a project's cash flows are positive after discounting them by the required rate of return,then it may be accepted if there are no better alternatives.

Question 24

The acceptance criterion for independent projects is to choose the project with:

A)the highest net present value.
B)the highest internal rate of return for mutually exclusive projects.
C)the lowest internal rate of return for independent projects.
D)the lowest net present value.

Question 25

A weakness of the payback method of project evaluation is that it:

A)fails to take account of the magnitude and timing of the cash flows.
B)rejects all projects with a payback period greater than the maximum payback period.
C)rejects all projects with a payback period less than the maximum payback period.
D)fails to take account of the timing of cash flows,but does take into account the magnitude of cash flows.

Question 26

The benefit-cost ratio for a project with an initial outlay of $9000 and net cash flows of $5000 p.a.for the next three years and a required rate of return of 10% p.a.is:

A)$3434.
B)0.3815
C)1.21
D)1.3815

Question 27

For mutually exclusive projects,the internal rate of return and the net present value give consistent accept/reject decisions if:

A)the net present value profiles for both projects do not intersect.
B)the required rate of return is less than the discount rate,which causes the net present value profiles of the two projects to intersect.
C)the investment projects have equal lives.
D)the investment projects have identical cash flows in the final year.

Question 28

Consider the following data:
Using the average investment,the accounting rate of return is:

A)45%
B)42.9%
C)28.6%
D)57.1%

Question 29

Which of the following statements is false?

A)Accepting a project with an internal rate of return greater than the required rate of return should result in an increase in a firm's share price.
B)Accepting a project with an internal rate of return greater than the required rate of return should result in a positive net present value.
C)Accepting a project with an internal rate of return less than the required rate of return should result in a negative net present value.
D)Accepting a project with an internal rate of return equal to the required rate of return should result in an increase in a firm's share price.

Question 30

Consider the following projections:
What is the internal rate of return of a project (A minus B):

A)8.9%
B)3.5%
C)17.29%
D)5.01%

Question 31

Which statement about the selection of mutually exclusive projects using the benefit-cost ratio method is true?

A)The benefit-cost ratio selects the project with the lowest ratio.
B)The benefit-cost ratio may rank projects differently from the net present value method.
C)The benefit-cost ratio may select a project,even though it may have a negative net present value.
D)The benefit-cost ratio will not select a project with a ratio greater than 1.

Question 32

The net present value method of project evaluation is preferred to the internal rate of return method because:

A)the internal rate of return method may give multiple rates of return or zero rates of return in some cases,but not for mutually exclusive projects.
B)the internal rate of return method may give an inconsistent ranking due to the magnitude or timing of cash flows.
C)most projects are independent rather than mutually exclusive.
D)the internal rate of return method yields net present value profiles that do not intersect for mutually exclusive projects.

Question 33

The net present value for a project with a relatively long life is more sensitive to changes in the required rate of return than the net present value for a project with a relatively short life because:

A)the internal rate of return is greater the longer the term of a project.
B)interest is compounded over time.
C)a change in the discount rate has a much greater impact on more distant cash flows.
D)distant cash flows are more uncertain.

Question 34

Assuming that cash flows are received evenly throughout the year,what is the payback period for a project with an initial outlay of $15 000 and cash flows of $4000 p.a.for the next five years?

A)5 years.
B)3 years.
C)3.75 years.
D)4 years.

Question 35

A firm may choose a project with a rapid payback period rather than one with a larger net present value because:

A)it may have a poor cash position and limited access to outside finance.
B)no reason is necessary,as it would never happen.
C)the payback period is a superior means of evaluating projects.
D)the required rate of return may not be readily determinable.

Question 36

What is the accounting rate of return for a project that requires an initial outlay of $15 000 and has the expectation of future earnings of $4000 p.a.for the next five years? Assume the required rate of return is 8% p.a.

A)1.333
B)$970.80
C)1.0647
D)1.564

Question 37

For independent projects,which of the following statements is true?

A)The internal rate of return and net present value methods lead to the same reject/accept decision.
B)The internal rate of return and net present value methods lead to the same reject/accept decision,except where the internal rate of return is greater than the required rate of return.
C)The internal rate of return and net present value methods lead to the same reject/accept decision,except where the internal rate of return is less than the required rate of return.
D)The internal rate of return and net present value methods do not lead to the same reject/accept decision if there are multiple internal rates of return.

Question 38

If net cash flows have been estimated on an after-tax basis,then:

A)the opportunity cost of capital is not appropriate.
B)they should be discounted by the after-tax required rate of return.
C)they should be discounted by the before-tax required rate of return.
D)tax cash flows should be added back and net cash flows should be discounted by the before-tax required rate of return.

Question 39

The number of internal rates of return is:

A)not affected by the magnitude of cash flows.
B)not limited to the number of sign reversals in the cash flow stream.
C)limited to the number of sign reversals in the cash flow stream.
D)limited by the life of the investment.

Question 40

Which of the following statements in regard to the internal rate of return method is false?

A)A project may have multiple internal rates of return.
B)It eliminates the need to calculate the required rate of return.
C)Two sign reversals in the cash flow stream are a necessary condition for two internal rates of return.
D)None of the given options.

Question 41

Which of the following statements about the internal rate of return method is false?

A)The internal rate of return is equal to the required rate of return when the net present value is equal to zero.
B)The internal rate of return is greater than the required rate of return when the net present value is negative.
C)The internal rate of return represents the expected rate of return on a project.
D)The internal rate of return is the discount rate that forces the present value of a project's inflows to equal its outflows.

Question 42

Which of the following statements about EVA is false?

A)EVA can be improved by increasing earnings.
B)EVA can be improved by reducing the capital used.
C)EVA ranks projects with the same outlay,life and total earnings equally,even though their patterns of earnings may be different.
D)EVA can be improved either by increasing earnings or by reducing the capital used.

Question 43

Which of the following statements is true?

A)The internal rate of return is equal to the required rate of return when the net present value is equal to zero.
B)The internal rate of return is greater than the required rate of return when the net present value is negative.
C)The internal rate of return is less than the required rate of return when the net present value is positive.
D)None of the given options is true.

Question 44

A company has the opportunity to invest in two projects,both of which have a positive net present value.They will accept both projects if they are ____________ investments.

Question 45

A fundamental problem with using the accounting rate of return for project evaluation is that it ignores the ________________ of the earnings stream.

Question 46

The internal rate of return is the discount rate at which the net present value is equal to ________.

Question 47

The problems associated with ranking mutually exclusive projects using the internal rate of return methodology can be overcome by determining the __________ internal rate of return.

Question 48

What is the net present value of a project with a cost of $100 000 that generates cash flows of $40 000 over the next three years,and the required rate of return is 15%?

A)$8670
B)-$8670
C)$7890
D)-$5210

Question 49

What should the project manager do if it is determined that the net present value is negative but the internal rate of return is less than the required rate of return?

A)Decrease the required rate of return.
B)Reject the project.
C)Increase the required rate of return.
D)Calculate the profitability index.

Question 50

Economic value added is the most widely used form of project evaluation.

Question 51

Net present value and internal rate of return always rank projects in the same order when conducting a project evaluation on mutually exclusive investments.

Question 52

A major shortcoming in the use of accounting rate of return as a method of project evaluation is that it ignores the time value of money.

Question 53

Real options are of greater value than 'now-or-never' prospects as they provide management with _________.

Question 54

Using the benefit-cost ratio,the decision rule is to accept all projects with a positive benefit-cost ratio.

Question 55

The benefit-cost ratio is also known as the profitability index.

Question 56

The benefit-cost ratio is calculated by dividing the present value of the future net cash flows by the ________________.

Question 57

A weakness with the accounting rate of return is that it:

A)does not provide an indication of the risk of a project.
B)is based on accounting earnings rather than cash flows.
C)ignores the timing of earnings.
D)All of the given answers are weaknesses.

Question 58

A company should approve all projects with a ___________ net present value.

Question 59

What is the approximate internal rate of return of a project with a cost of $100 000 that generates cash flows of $40 000 over the next three years?

A)2%
B)5%
C)9%
D)10%

Question 60

Any difference in the magnitude or timing of the cash flows derived from investment projects may cause a difference in the ranking of investment projects using the internal rate of return and net present value methods.

Question 61

The payback period method of project evaluation provides a simple way of controlling for the risk of a project.

Question 62

A company is to evaluate the following mutually exclusive investment proposals.The required rate of return is 10%. Calculate each proposal's net present value and internal rate of return.

Question 63

The following three investments projects are independent.If the required rate of return is 12% p.a. ,which projects are acceptable using both the NPV and IRR methods?

Question 64

A company is to evaluate the following mutually exclusive investment proposals.The required rate of return is 10%. Why do these methods lead to different rankings of the proposals A and B?

Question 65

An investment of $1000 is expected to generate net cash flows of $330 at the end of each of the next four years.The internal rate of return of this project is 12%.